The U.S. construction industry is a major sector of the economy, employing more than 6 million people with over 650,000 employers. While the sector is important to the economy of the United States, businesses, especially small businesses in the industry are often faced with cash constraint, requiring them to source for loans from different options.
Types of construction loans
There are different construction loan options that businesses operating in the industry can use to expand their business or address any other financial challenges they face.
1. Construction Mortgage Loans: This is a loan that can be used to finance the purchase of land, or construction of a home on land. These loans are usually structured so that the lender pays a percentage of the completion costs and the builder or developer, pay the rest.
Generally, construction loans have short terms because they reflect the amount of time it would take to build the project; a year-long term is common.
2. Construction-to-Permanent Loans: Otherwise known as the CPloan, construction-to-permanent loans are another option for financing the building of a new home. CPloans offer some extra convenience to borrowers by combining two types of loans in a single process.
An advantage of construction-to-permanent loans for small business owners and homeowners is that instead of having to get a loan for the construction phase and then a second for financing the finished project, borrowers can get two loans at once.
3. Commercial Construction Loans: These loans are for bigger projects like the construction of a multi-family home or apartment building, high-rise, multi-unit retail center, commercial office building, or other type of larger project.
Lenders for modern commercial construction loans for apartments and similar big projects are extremely risk-avoidant, and will expect a developer to shoulder most of the risk by covering up to 90% of the cost of the project.